What is a cryptocurrency? How does cryptocurrency work? What are the different types of cryptocurrency?

Getting started in cryptocurrencies raises many questions. 

In this guide, you’ll learn everything you need to know about cryptocurrencies and how to invest in crypto assets.

What’s the definition of cryptocurrency?

In a lot of ways, cryptocurrencies have a bad name. The word cryptography often implies secret, hidden, or guarded. But in reality, cryptocurrencies are generally open, transparent, and verifiable. 

The currency part of cryptocurrency is also somewhat problematic because while cryptocurrencies can act as a peer-to-peer form of payment, they also have a wide variety of other uses ranging from a programmable financial infrastructure layer to a digital store of value and a new form of computing.

But the reason that cryptocurrencies are called cryptocurrencies is that they all have the commonality of being a digital asset or decentralized system of exchange that uses public-key cryptography to create a system of wallets and private keys.

A cryptocurrency’s main objectives are to secure financial transactions, control the creation of additional units, and verify the transfer of assets.

What is cryptocurrency?

New kinds of cryptocurrencies are constantly being created to serve different purposes. Most of the cryptocurrencies that are described below fall into the category of permissionless blockchains.

A cryptocurrency is a unit of account on a blockchain, which is like a massive ledger. 

Cryptocurrency wallets hold the cryptographic keys necessary to interact with the digital assets that are stored on the blockchain’s ledger. 

Cryptocurrencies are digital assets that are also known as cryptoassets. Depending on the designed use case, cryptocurrencies have properties similar to traditional currencies – they can be exchanged or used as a means of payment, for example – while cryptoassets act more like an independent investable asset class, such as stocks, bonds, or real estate.

Cryptocurrencies don’t depend on a central server or computer. Instead, cryptocurrencies are part of a decentralized network comprised of thousands of distributed computers.

What’s the purpose of cryptocurrency?

The advantages of cryptocurrencies over more traditional fiat currencies: 

Fraud-proof: When new cryptocurrencies are created, the coins, their owners’ information, and the transaction details are stored in a public ledger. Although this ledger is public, the owners’ identities are encrypted and protected via the key system mentioned earlier.

Transaction Legitimacy (solving double spend): Before cryptocurrency can be sent, a wallet address is checked by the ledger to ensure adequate funds are owned by the sender. The digital ledger – the blockchain, maintains a record of all the transactions that take place between digital wallets. 

Instant settlement: Unlike traditional money transfer services, cryptocurrencies work more like digital cash, and the final settlement happens within minutes (the exact times are subject to the mining process described below), which is a massive financial innovation. Rather than complex and proprietary infrastructure to complete transactions, all people need to send and receive cryptocurrencies is a smart device and an internet connection.

Ownership: Permissionless cryptocurrencies are not owned or controlled by any corporation or government, although cryptocurrency use is regulated in certain countries.

Accessible: Cryptocurrencies have the potential to increase financial inclusion (check out the infographic section on this page for more background) by driving down the costs per transaction (especially for sending money across borders or around the world) since they do not require a bank or credit card account to use. Most times, all that’s required to get started with cryptocurrencies is a smartphone and a trustworthy cryptocurrency wallet (like Abra).

10 most popular cryptocurrencies to invest in

The most popular cryptocurrencies to buy based on market cap:

Bitcoin (BTC)

Bitcoin (BTC) is the cryptocurrency market leader. 

Bitcoin is the first massively adopted cryptocurrency getting most of the attention and dominating other cryptocurrencies.

What’s the story of Bitcoin?

Bitcoin was born in 2008 when an unknown person or group of people named Satoshi Nakamoto published the Bitcoin whitepaper.

Since then, many other cryptocurrency systems (including many in the rest of this list) have considered Bitcoin as a model and created other kinds of cryptocurrencies based on the same concept and open-source computer code (in fact, if you want to, you can also take Bitcoin’s code and build your own cryptocurrency, you can find all of the code on GitHub).

Looking for more about the history of Bitcoin? Check out this illustrated history called Code meets money.

On January 12, 2009, Satoshi Nakamoto performed the first Bitcoin (BTC) transaction by sending 10 BTC to a coder named Hal Finney.

By 2010, Nakamoto disappeared along with an estimated one million BTC. Bitcoin’s development and maintenance was taken over by the Bitcoin Foundation in 2012. Since then, and over the last ten years, the bitcoin price has continued to rise.

Why are people investing in Bitcoin?

  • Bitcoin is a globally accessible digital store of value.
  • People also use bitcoin as a currency. Today, more than 100,000 online merchants make transactions using bitcoin (BTC).
  • People buy bitcoin for the same reasons that investors buy gold or stocks — as a speculative investment with the expectation that the price will rise in the future.  
  • Bitcoin is even used to collateralize other kinds of financial transactions. The programmable features of Bitcoin (like its multi-sig contracts) make it a perfect platform to build universal and cost-effective financial products and services.

Bitcoin Cash

Crypto Bites: A chat with Bitcoin.com CEO Roger Ver

Watch: Abra founder and CEO in conversation with Bitcoin.com CEO Roger Ver.

Bitcoin Cash was created following a split (or a fork) of the original Bitcoin blockchain. 

The split was the culmination of a long debate surrounding ideas about increasing Bitcoin’s block size, or the number of transactions that can be processed per 10-minute block cycle.

A hard fork is a tool that developers and communities of cryptocurrency use to make changes and modifications to the blockchains.

The main purpose of increasing the block size was to increase the ability of bitcoin to confirm more transactions per block, the speed of network times, and reduce the cost per transaction. Bitcoin Cash advocates thought that Bitcoin should act more like cash, which requires speed and low costs.

The Bitcoin Cash movement was largely spearheaded by Roger Ver, a well-known Bitcoin supporter since its early days.  

Eventually, Ver thought that Bitcoin was losing its way as a better peer-to-peer digital payment system, mainly because the block sizes were too small and the transactions were becoming too expensive so he helped create Bitcoin Cash as an alternative.

Ethereum (ETH)

Ethereum is the second-ranking cryptocurrency by market cap. It was created in 2015 by Vitalik Buterin.

Check out part two in our illustrated history of cryptocurrencies: Ethereum and the reinvented internet.

Ethereum is not just a digital currency, but a blockchain-based distributed computing platform and operating system that offers smart contract functionality. 

What are smart contracts?

Smart contracts outline conditions that need to be fulfilled on the blockchain. A smart contract is basically a computer program that executes a transaction after a series of requirements are met.

Smart contracts have a wide variety of applications including traditional business operations, but they also enable new kinds of technologies and innovations, like micropayments, or machines interacting with other machines. 

Ethereum is the oldest and so far the most popular smart contract-based cryptocurrency platform.

Ethereum at a glance

A computer programmer and contributor to Bitcoin Magazine, Vitalik Buterin, wanted to create a cryptocurrency that made it easier for blockchain developers to build decentralized applications.

Working with others interested in the idea of a smart contract platform, he developed the Ethereum framework. And then he published the Ethereum white paper

Ethereum’s creation enabled digital decentralization using smart contracts, which created a new roadmap for the future of the internet.  

  • Ethereum is a popular platform that is used by developers to create other kinds of coins and projects. The ease of creating new tokens and coins fueled the cryptocurrency industry’s initial coin offering (ICO) boom of 2017. ICOs, which share some resemblance to an IPO in the mainstream investment world, are used as a fundraising mechanism for individuals and groups looking to launch a new decentralized project. The problem during the ICO boom was that many projects were launching solely to take advantage of the hype and resulted in little more than scams. The ICO market since 2017 has since slowed down, but the idea that Ethereum can be used as a platform to build other decentralized applications remains. Ethereum is the basis for ERC20 tokens that can be traded back and forth to interoperate. You can build these tokens to exchange tokens and other forms of value.
  • Ethereum also enables the creation of ERC721 tokens, which are used for creating tokens that are unique (non-fungible) and have potential uses for representing physical and digital objects and projects that are unique or one-of-a-kind, such as collectibles. 

Listen to the Abra Money 3.0 Show where Abra founder and CEO Bill Barhydt talk to Ethereum founder Vitalik Buterin.

Ripple (XRP)

Ripple’s XRP does not fit squarely with the definition of a decentralized, permissionless cryptocurrency system. Instead, it’s more accurately defined as a real-time gross settlement system (RTGS), currency exchange, and remittance network.

XRP at a glance

XRP was created by the company Ripple Labs Inc. with the purpose of speeding up international payment transfers and making them cheaper and more efficient.

XRP eliminates the challenges current banking and financial systems have in transferring money which is slow and expensive. The speed, efficiency, and cheaper costs for global payment transfers make it more acceptable for the banks and other financial institutions. 

Unlike other cryptocurrencies, XRP is more like a gateway or bridge to transfer fiat currency, which makes it an interesting alternative for established banks and other financial institutions.

Litecoin (LTC)

Litecoin was invented to improve on Bitcoin by decreasing the block generation time, increasing the maximum number of coins created by changing the hashing algorithm.

Litecoin at a glance

In 2011, Charlie Lee created Litecoin to speed up blockchain-based transactions at lower rates (similar to the idea that inspired Bitcoin Cash). The launch of the Litecoin network by Lee, an ex-Google employee, gained huge recognition and was adopted by a large number of Bitcoin enthusiasts.

In 2013, Litecoin reached $1 billion market capitalization.

Why do people invest in Litecoin?

  • Litecoin transactions take a shorter amount of time.
  • It has lower transactional costs.

Cardano (ADA)

One of Ethereum’s co-founders, Charles Hoskinson, created another very popular cryptocurrency, Cardano (ADA).

Like Ethereum, Cardano is used as a platform to build smart contracts and decentralized apps. Cardano was developed to improve on the technology part of Ethereum’s blockchain.

Monero (XMR)

Monero was launched in 2014. This cryptocurrency is donation-based and has strong support from cryptocurrency enthusiasts.

Monero uses a security technique, “ring signatures,” that doubles the privacy of users and transactions, making it one of the top cryptocurrencies.

NEO (NEO)

NEO was created in 2014 by Da Hongfei. Previously known as AntShares, NEO works in a similar way to Ethereum. 

The NEO network is used for building smart contracts and launching initial coin offerings (ICOs). NEO has the advantage of being supported by the government of China. 

Zcash (ZEC)

After its launch in late 2016, cryptocurrency enthusiasts were attracted to Zcash because of its focus on security and privacy. Zcash reveals fewer identifying transaction details such as the sender, recipient, and other transactional information.

Dash (DASH)

Created by Evan Duffield, Dash makes fast digital transactions untraceable using its decentralized master nodes network. Previously known as Darkcoin, Dash has been one of the most popular privacy-oriented cryptocurrencies since its launch in 2014.

EOS (EOS)

EOS is one of the newest cryptocurrencies. Even though it just launched in 2018, it’s now considered one of the top cryptocurrencies. EOS is inspired by Ethereum and offers another competing platform to build decentralized applications. 

EOS consists of EOS.IO, which was designed to resolve the scalability issues of Bitcoin and Ethereum. 

Now it’s time to learn about the stories behind a few of these top cryptocurrencies. This will give you a detailed idea of how each of these cryptocurrencies was created, their benefits, and much more.

How does cryptocurrency work?

One of the big mantras in the cryptocurrency investing space is “do your own research.” It makes a lot of sense to read up on and understand how different cryptocurrencies work before starting to invest in them. Here are a few key points about how cryptocurrency works (the following explanation is a high-level overview of blockchains that operate using proof-of-work, which is explained in greater depth below).

  • A cryptocurrency wallet is a key building block for cryptocurrency-based financial transactions. 
  • To transfer balances from your wallet to someone else’s wallet (it could be another person or a business or another crypto service) you use the wallet software.
  • Your wallet is a public wallet in that other people are able to use blockchain analysis tools to see what the wallet balance is and other transaction details. When you transfer balances, funds are transferred from one public wallet to another, all accounted for on a publicly auditable blockchain.
  • Even though your wallet is public, wallet holders control private keys which are needed to access or execute transactions using the wallet. 
  • The transactions that take place are then encrypted, broadcasted to the cryptocurrency network, and then queued up to be put in the public ledger. 
  • This public ledger is known as “blockchain,” because many transactions take place per second and these transactions are sequentially added by the miners in the ledger.
  • When these transactions are recorded in the public ledger, this process is known as “mining,” commonly known as “cryptocurrency mining” or “Bitcoin mining.”
  • The information on who has sent the funds is private and the amount of the transaction is public.
  • Every transaction has its own unique set of keys, and if you have these keys, you own the amount of cryptocurrency, in the same way as with a bank account.

How is cryptocurrency created?

Cryptocurrencies rely on consensus algorithms in order to function in a distributed way without a centralized gatekeeper or controlling authority. There are a number of consensus algorithms that various cryptocurrency projects are using, but the two most popular are proof-of-work and proof-of-stake.

Proof-of-work

The most common process for creating a cryptocurrency is proof-of-work (POW).

During the proof-of-work process, miners have to solve a complex mathematical puzzle to gather transactions together on the blockchain. It’s the same process as when you have a lock whose combination is difficult to crack. You try one combination after another to open the lock. The same is the case with the proof-of-work process for creating a cryptocurrency.

Every miner is trying various combinations on the same blockchain network. Once a miner’s software finds the solution, other miners can verify the block easily and see that the block is correct. The new blocks are added sequentially in the existing chain of blocks (which is where blockchain gets its name).

To mine, you need to use the computer processing power to solve the puzzle. The energy-intensive nature of POW is part of what helps secure the network because it would cost a lot in terms of time and resources for a bad actor or a group to coordinate and gain control of the blockchain. 

Miners are compensated for their work in verifying transactions by solving complex computation in the form of a block reward, which is the issuance of new coins. As a blockchain network increases in value it because increasingly more difficult to mine, which makes it more secure. If you crack the puzzle, you are rewarded.

Proof-of-stake

The proof-of-stake (POS) process for creating cryptocurrency means that participants in the network stake their coins as collateral to vouch for the legitimacy of transactions.

This process requires less computational power and reduced electricity costs and is viewed as an alternative form of consensus. However, there are concerns surrounding the overall security of the proof-of-stake method. Ethereum is scheduled to move from a POW method to a POS in the near future.

How and why do cryptocurrencies gain value?

Bitcoin chart from April 28, 2013 to July 30, 2019

This chart shows the growth of the Bitcoin market cap between April 2013 and July 2019.

There are a few reasons why cryptocurrencies gain value, including the idea of digital scarcity, network effects, internet-native exchange of value, and speculation about future values.

Limited supply

Some cryptocurrencies, like Bitcoin, have a pre-programmed limit, which creates a scarcity pressure similar to gold.

A strong and loyal following

The leading cryptocurrencies have strong communities of developers, advocates, and promoters that help spread adoption and usage. In some ways, getting involved with cryptocurrency communities is a lot like following sports teams, complete with crazy fans who help spread the message around the world.

Utility

People use cryptocurrencies to pay for goods, quickly and cheaply send money across borders, as a digital store of value, and as a hedge against inflation in places where fiat currency is becoming less valuable. A lot of newer cryptocurrencies are trying to use the functionality of blockchain and smart contracts to solve problems such as better ways to monetize the internet or rent computer space, or even create a hybrid form of digital money by creating stablecoins.

Market speculation

Another big driver of increasing cryptocurrency prices is that early investors are speculating that cryptocurrency protocols like Bitcoin and Ethereum are going to be worth more in the future once more use cases and supporting technologies are developed. Right now the total market cap for cryptocurrencies is only a small fraction of other valuable markets such as gold, real estate, or global equities. If cryptocurrencies as a market can capture liquidity similar to some of those other valuable markets, then over time the overall value of the cryptocurrency market could increase dramatically.

Types of cryptocurrency

Cryptocurrencies often get lumped together in one big category, but there are many different types of cryptocurrencies that developers are creating to try and solve a number of problems.

There are over 2,200 cryptocurrencies listed on publically traded markets. More cryptocurrencies are being launched every day, while other projects are fading away.

What is altcoin?

Cryptocurrency market observers and pundits often refer to altcoins. Altcoins are the alternative cryptocurrency to the market leader, Bitcoin.

The term comes from cryptocurrency’s early days when Bitcoin was the first massively adopted cryptocurrency. As other coins followed, people started creating different types of cryptocurrencies in an attempt to become as successful as Bitcoin.

Many altcoins work in a very similar way to Bitcoin (in fact many altcoins are forks of Bitcoin), while others such as Ethereum, Zcash, and Monero, are building completely different kinds of protocols to solve different kinds of problems, such as privacy, security, and decentralized computing. 

What was the first altcoin?

Namecoin was developed in 2011 and is considered the first altcoin. Namecoin is a fork of Bitcoin and uses the same proof-of-work algorithm.

After Namecoin, hundreds of altcoins came into existence to solve more specific problems or to have a different form of governance.

Today, there are thousands of different kinds of altcoins and it seems like new projects and companies are being announced regularly, signaling massive growth in the space.

What is a crypto token?

A crypto token is a type of virtual tradeable asset that is developed for specific purposes on a blockchain. 

An example is a new startup that issues tokens to represent a position in a new product or a software license. 

Another example of crypto tokens can be of ERC20 tokens. An ERC20 token is a digital standard used on Ethereum blockchain for smart contracts and is used in the exchange of tokens and other forms of value.

What’s the difference between a cryptocurrency coin and a token?

The difference between a cryptocurrency coin and a crypto token is that cryptocurrency is a digital or virtual currency that is designed to act as a unit of exchange (or a peer-to-peer digital cash-like system), while tokens are designed to fulfill some kind of utility on a blockchain network.

A coin defines value and is even valid for value transfer. Meanwhile, a token is something that resembles a contract.

An example here would be a token given to customers to obtain support services at a discounted rate or completely free.

Examples of crypto tokens and their use cases

To issue tokens, you need a platform. Ethereum is one of the top blockchain platforms for issuing tokens that are backed by smart contracts.

Here are some examples of how ERC20 tokens work on Ethereum blockchain:

0x protocol

0x protocol (pronounced “zero-ex”) is a decentralized, permissionless exchange protocol that allows ERC20 tokens to be traded on the Ethereum blockchain. Developers can also use the 0x protocol as a platform to build their own decentralized exchange applications for Ethereum-based assets.

Basic Attention Token

The Basic Attention Token (BAT) is the currency that powers a blockchain-based digital advertising system made up of users, publishers, and advertisers. The BAT is an ERC20 utility token for the Brave browser — an open-source browser with a privacy focus. When BAT is integrated into the Brave browser, the attention that a user gives to content on the browser is valued in BAT tokens; users receive a payout (in BAT) equal to 70% of the gross ad revenue, and publishers receive a percentage of the remaining 30% as well as a payment (in BAT) from the advertisers whose content they publish.

The cryptocurrency market

The definition of market cap in cryptocurrency is similar to the definition in traditional securities.

In the stock market, the market cap is defined as the value of security derived from multiplying the price of outstanding stock shares and the current stock price.

What is market capitalization in cryptocurrency?

In cryptocurrency, the market cap is the current circulating supply of tokens multiplied by the current token price. So, for example, if the current bitcoin price is $20 and there are 100 bitcoin in circulation, then the bitcoin market would have a capitalization of $2,000. 

Why are there so many cryptocurrencies?

Growth in natively digital products and services

Bitcoin was invented as a decentralized, peer-to-peer alternative to the traditional financial system.

Bitcoin is an internet-based payment system that uses cryptographic methods and a peer-to-peer version of electronic cash for secured financial transactions.

But as bitcoin became more popular and more widespread, people began realizing that there are a lot of different ways that the blockchain technology underpinning cryptocurrencies can be used to create other kinds of digitally-based solutions to other issues. 

Some of the problems that cryptocurrencies are being developed to solve include:  

Payments and currencies: Bitcoin, Litecoin, Nano, Dogecoin.

Privacy: Monero, Verge, Komodo, Zcash.

Computing and data management: Siacoin, Golem, Holo.

Platforms: Ether, Cardano, NEO, NEM.

Business and protocols: Binance Coin, ICON, VeChain, Ardor.

Fintech: XRP, Stellar, OmiseGo, QASH.

Entertainment: Steem, Tron, Loom, WAX.

There are also other reasons why cryptocurrencies are created: Cryptocurrency forking is the separation of blockchain into two branches. This split happens due to a change in the algorithm or other software changes.

There are two types of cryptocurrency forks: a soft fork and a hard fork

  1. A soft fork is an update to the underlying blockchain that is adopted by the entire network. An example of a soft fork is SegWit.
  2. A hard fork happens when part of the network adopts proposed updates while the remainder of the network sticks to the existing code. The fork can result in an entirely new blockchain (and associated cryptocurrency — examples of a hard fork are Bitcoin Cash, Bitcoin Gold, and SegWit2x, which all split from the original Bitcoin blockchain).

Can people invest in fractional amounts of cryptocurrencies?

Most people have various questions when they are trying to understand investing in fractions of bitcoin.

  • Can I buy a small fraction of Bitcoin?
  • Do I need to buy the whole Bitcoin?
  • Can I buy half of a Bitcoin?

The short answer is yes!

One bitcoin can be divided into smaller fractions. One fraction of a bitcoin is known as a Satoshi.

The name of the fraction, a Satoshi, is derived from the creator of Bitcoin, Satoshi Nakamoto.

Here is a representation of a bitcoin in Satoshis:

1 Satoshi = 0.00000001 ฿
10 Satoshi = 0.0000001 ฿
100 Satoshi = 0.000001 ฿
1,000 Satoshi = 0.00001 ฿
10,000 Satoshi = 0.0001 ฿
100,000 Satoshi = 0.001 ฿
1,000,000 Satoshi = 0.01 ฿
10,000,000 Satoshi = 0.1 ฿
100,000,000 Satoshi = 1 ฿

This means that a bitcoin can be divided into 100,000,000 fractions.

You can buy 1 Satoshi, 1,000 Satoshis, 1,000,000 Satoshis — as many as you want. Buying an entire bitcoin can be expensive, so it’s useful to know that you can buy fractions of bitcoin, and other cryptocurrencies as well.

Are cryptocurrencies legal?

The cryptocurrency industry is becoming more and more regulated around the world, which is a good thing because new regulations are also a sign of growing mass adoption. Generally, cryptocurrencies are legal to buy, sell, own, send, and receive in most parts of the world.

How are cryptocurrencies taxed?

Disclaimer: All the legal and tax information provided here is for informational purposes only and you’re strongly advised to do your own research and/or seek professional help. The examples cited below are based on the cryptocurrency trades happening in the United States.

As per the IRS treatment of cryptocurrencies, “General tax principles that apply to property transactions must be applied to exchanges of cryptocurrencies as well.”

There are different categories by which the taxation of cryptocurrencies are defined:

Settled for cash

If you sell a cryptocurrency position for cash, you have to report capital gains or losses on Form 8949. A coin position sold after being held for more than one year is subject to long-term capital gains. On the other hand, selling a cryptocurrency position before holding it for one year makes any gains or losses subject to short-term capital gains taxes (which are generally normal tax rates.

Exchanged for other cryptocurrencies

If you trade cryptocurrencies, the same property exchange rules apply because they are considered as capital gains and losses.

Cryptocurrency mining

If you successfully mine a cryptocurrency, the fair market value of the mined coins becomes a part of your gross income. If your mining operations consist of a trade or a business, you are liable to pay self-employment tax on the services that generated income.

Payments for goods and services

If you’re an employee or a contractor receiving cryptocurrencies for your services, your income is taxable and must be reported on a W-2 form. The cryptocurrencies are taxed at fair market value. 

Donating cryptocurrencies

If you donate your cryptocurrencies to charity, you are not liable to pay taxes. But to donate cryptocurrencies, you must have held the coins for more than one year.

Due to uncertainty and lack of guidance, the IRS is working hard to bring compliance enforcement in cryptocurrency transactions.

How do you buy cryptocurrencies?

Follow the step-by-step beginners’ guide to buy cryptocurrencies:

Download Abra

One easy way to start buying bitcoin is to download Abra.

Abra is an easy to use investment app that allows users to buy, sell, and hold a number of cryptocurrencies. Abra users can also send natively supported cryptocurrencies (currently Bitcoin, Bitcoin Cash, Ethereum, and Litecoin) to and from and Abra wallet and an external crypto wallet. 

Connect a bank account/credit card/debit card

The next step is to connect your Abra wallet to a bank account, credit card, or debit card.

Note that when you buy cryptocurrencies using a bank account, it will take 4 to 5 days to process. But when you buy cryptocurrencies using a credit card or debit card, you can buy Bitcoin instantly.

Cryptocurrency prices

Cryptocurrency prices continue to rise and fall dramatically. Due to wild price fluctuations, the cryptocurrency market is volatile and subject to price swings.

Before you start investing, it’s essential to understand some of the factors influencing the rise and fall of cryptocurrency prices.

Differences between cryptocurrency and fiat currency

Both cryptocurrencies and fiat currencies (U.S. dollar, euro, pound sterling) have their own store of value and are also used for making transactions. But aside from these similarities, there are many differences.

Fiat currencies are issued, controlled, and maintained by the central government, while cryptocurrencies are created using decentralized computing networks and maintained by supporters and communities, rather than companies or governments.

Unlike digital transactions in cryptocurrencies, fiat currencies have physical transactions. 

With a fixed supply, it’s almost impossible to reduce the value or importance of cryptocurrencies during inflation. In contrast, fiat money has an unlimited supply and often central banks print more in the face of a financial crisis, which devalues the money supply over time.

What drives the price of cryptocurrencies?

There are many factors influencing the rise and fall of cryptocurrency prices.

Limited supply: Due to fixed supply, cryptocurrencies are often compared with gold, which is also considered scarce. 

Supply and demand: Cryptocurrencies are going through the process of worldwide global adoption. Every day more people are converting fiat to crypto and learning how to invest in new cryptocurrency systems, which increases demand.

Speculation: This is one of the most influential factors that drive cryptocurrency prices. If people speculate that the price of a particular cryptocurrency will increase after looking at the continuous increase in the price, cryptocurrency prices will rise. It’s a feedback loop that encourages more adoption, which in turn drives up the price, which drives more people to speculate on future values. 

Government regulations: Regulatory discussions around the world can impact price movements. Sometimes government or regulatory support of cryptocurrencies can move prices positively, while other times, regulatory ambiguity can negatively impact cryptocurrency price movements.

Security hacks: Security breaches in cryptocurrency exchanges, wallets, and other areas result in negative market sentiment. 

Size of the network: The price of cryptocurrencies also depends on the size of the network. Cryptocurrency networks that have more users and are more widely distributed are correlated to higher values because they are considered more secure. 

New cryptocurrencies: In the early years, Bitcoin was the only competitive cryptocurrency in the market. Now more than 2,200 cryptocurrencies are competing with Bitcoin for market share. 

Mining difficulty: Most cryptocurrency protocols rely on the mining process to create and secure the coins that are part of their network. Overtime the computation behind mining will increase in difficulty, which will increase both network security and the scarcity of the associated cryptocurrency. 

Energy usage: Cryptocurrency mining requires a considerable amount of energy, which is used to secure the network but also has tangible costs. Another way to say this, or to think about it, is that cryptocurrency networks are backed by the inputs of energy they consume.

The news and media: The news and media are influential factors in cryptocurrency prices. The good news about prices, or adoption, or positive regulatory news can lead to positive price increases.

Market manipulation: Market manipulation in crypto has a significant influence on the price of cryptocurrencies. Crypto whales are the people or groups of people who own significant percentages of cryptocurrencies and they can manipulate the price by seeing large amounts in a single transaction.

Mass adoption: Only a small number of people have invested or traded in cryptocurrency. As more people adopt cryptocurrencies, the price of the market leaders will likely increase.  

Cryptocurrency mining

What is cryptocurrency mining? How do you mine cryptocurrency? Can you make money mining Bitcoin?

Cryptocurrency mining is often referred to using different terms such as Bitcoin mining, altcoin mining, and crypto coin mining. Different cryptocurrencies use slightly different mining processes based on the structure of the underlying protocol.

The process of proof-of-working mining uses intensive computation to verify the integrity and legitimacy of digital transactions and compiled into blocks. Once transactions are verified, new coins are given as a reward to the miner that first successfully process, which incentives mining operations and helps to grow the network. 

How to start cryptocurrency mining

You need to invest in hardware and software before you start mining cryptocurrencies.

There are a couple of key components needed to start cryptocurrency mining. There are a few different ways to configure mining operations, but generally, the operation will consist of specialized software, hardware, and an affiliation with a mining pool or group of other miners.  

An image of a bitcoin mining operation.

 

This is an image of what a cryptocurrency mining operation (image courtesy Wikimedia)

Cryptocurrency mining hardware

To process the cryptocurrency mining operations, you need an ATI graphics processing unit (GPU). One well-known GPU is ASIC chip. Any GPU or ASIC miner will help you with all the mining operations.

ASIC stands for Application-Specific Integrated Circuit. ASIC miners (commonly known as “mining rigs”) are the hardware devices that help you to carry out cryptocurrency mining in real-time without any delay.

An ASIC miner mines cryptocurrencies at the highest hash rates and also consume a lot of energy.

Here is the process for mining cryptocurrencies using ASIC miners:

  • Connect the ASIC miner to your mining software
  • Become a member of a mining pool

Once you connect the ASIC miner to the mining software, the software gives the ASIC miner all the information, such as:

  • Which cryptocurrency to mine
  • Where to mine the cryptocurrency
  • Who should receive the mined cryptocurrencies
  • What to do with the block rewards

You will not see instant profits by mining cryptocurrencies using ASIC miners. The price of the currency being mined affects the mining profit margin.

Cryptocurrency mining software

To mine cryptocurrencies, you need to install the mining software package. It’s open-source, but you need to choose the right one and prepare before you start mining, here’s a guide to help you evaluate the best option and step-by-step tutorials that will help you get started with a selected crypto mining software.

Become a member of an online cryptocurrency mining pool

An online mining pool is a community of cryptocurrency miners who combine their computers or other computational resources over a network to increase profitability and obtain some kind of profit stability. You need to become a member of an online mining pool and there are a number of different options available, but the most popular in terms of market share are BTC.com, AntPool, and F2Pool.

Cryptocurrency cloud mining: An alternative to self-hosted mining

What is cloud mining?

Cloud mining means allowing a third party to mine cryptocurrencies for you, and these services require a fee-based membership in exchange for their mining services.

How does cloud mining work?

In cloud mining, you don’t have to do anything besides outsource your mining to the cloud mining company. You pay for mining, and everything else is taken care of by the mining company. The more you pay to the company, the more coins they will mine.

The process for mining cryptocurrencies using cloud mining:

  1. Choose the right cloud mining company
  2. Choose a contract based on how much mining power you want to rent for you
  3. Receive mined cryptocurrency coins in your personalized wallet

Cryptocurrency wallet

What is a cryptocurrency wallet? Do you need a wallet for each cryptocurrency?

A cryptocurrency wallet is a software program, device, service, or medium to store your public and private keys.

A cryptocurrency wallet, unlike a physical wallet, doesn’t store your cryptocurrencies, instead is more like a key ring that stores your public and private keys, which are needed to access cryptocurrencies.

What are the private keys?

A cryptocurrency wallet stores your private keys. A private key uses the cryptography method to ensure security while accessing your cryptocurrencies. In other words, private keys help you to locate your cryptocurrencies with complete protection against any theft or unauthorized access to your crypto funds. A private key is like a PIN to a bank account.

What are the public keys?

A cryptocurrency wallet also stores public keys. Public keys use an asymmetric-key encryption cryptography algorithm to convert a message into an unreadable format. A decryption cryptography algorithm is used with a different but matching private key, and the combination of the private and public key enables secure communication. A public key is like your bank account number.

Do you need multiple crypto wallets?

No. You can use one digital wallet for trading multiple cryptocurrencies. Many digital wallets support a multi-coin/multi-currency option, so you don’t need a separate crypto wallet to invest in each cryptocurrency

How do wallets work?

When people send you Bitcoin (BTC) or any other cryptocurrency, they are transferring access to their coins from their wallet address to yours. These digital currencies are attached to a public key. 

If you want to access these transferred cryptocurrencies or funds, you must match the private keys of your wallet with the public key attached to the cryptocurrencies you’ve received.

Once the public and private keys are matched, the digital currencies you’ve received are updated in your digital wallet. The balance of the sender’s digital wallet is updated with the decrease in their crypto balance.

Types of cryptocurrency wallet

There are generally two different categories of cryptocurrency wallets: hot storage and cold storage. The main difference between the two types of wallets are ease of use and storage security.

Hot storage

Hot storage crypto wallets are digital wallets that are stored on a computing device and are connected to the internet. The benefit of using a hot wallet is that you can access your wallet easily and quickly.

The types of hot storage wallets:

Desktop wallets

Desktop software that you download and install on your computer. You can’t access your cryptocurrency from any other computer or device except the computer on which it resides. When it comes to security, if your computer is hacked, you lose all your cryptocurrencies. Examples of desktop wallets are Exodus, Jaxx, Atomic, and Electrum.

Online/exchange-based/cloud wallets

An online wallet is a web-based wallet that stores your digital currencies and all other details on the cloud. You can access these wallets using any computing device, at any time, anywhere. A third party controls your online wallets, security and other processes. Your online wallets are more prone to thefts and vulnerabilities due to third party involvement. Online wallets save your private keys on third-party servers and are known as custodial wallets.

Mobile wallets

Mobile wallets are another type of hot storage wallet that you can use on both Android and iOS devices. With mobile wallets, you can store your keys on your mobile and can pay, send, receive, trade, and even invest in cryptocurrencies instantly. Mobile wallets are the best way to carry your digital currency with ease and comfort.

Some mobile wallets are non-custodial wallets. A non-custodial wallet means that you control both your public keys and your private keys. This is a much more secure arrangement than trusting a centralized custodian of your funds, although it does mean that you need to safeguard your private keys because if they are lost, access to your funds will be lost too.

Cold storage

Unlike hot wallets, cold storage wallets allow access to your digital currencies without connecting to the internet.

Cold wallets are either hardware or paper. They are often compared to savings accounts because you can use them for storing cryptocurrency for the long term.

Since they are not connected to the internet, cold storage wallets have fewer security risks than hot wallets, but there are still precautions that users need to take in order to protect their crypto holdings.

Hardware wallets

Hardware wallets store your private keys in the form of a hardware device, usually a USB stick-like device. You need to plug them into an internet-connected device to transfer your crypto funds. Just like software wallets, hardware wallets are portable. Two examples of hardware wallets are Ledger Nano S and Trezor.

Paper wallets

Paper wallets are wallets that have printed versions of your public and private key QR codes. As one of the oldest methods of storing cryptocurrencies, paper is a time-tested method of storing cryptocurrencies. 

An example of a bitcoin paper wallet.

This is an example of a paper wallet that is used to store cryptocurrency.

Additional resources

To learn more about cryptocurrencies be sure to check out our YouTube channel and the Money 3.0 podcast series.

We have also created this free Ultimate Cryptocurrency Guide, which contains more in-depth information about more than two dozen of the top cryptocurrencies.

Finally, the Abra blog contains a ton of information about cryptocurrencies and how they work. Here are a couple of recommended posts to get you started: Abra’s synthetic currency, Abra recovery phrase, and fixing finance: how the technology powering Abra is opening access to the world’s markets.